How can a company protect itself from a hostile takeover?
It is important to balance protective measures with the need to bring in new (venture) capital.
Some of the protective measures can and will work against new investors. It will require special measures in the shareholders agreements, resulting in a patchwork of clauses. This will further complicate negotiations and new investments down the line.
— A poison pill. If one shareholder (the aggressor company) buys more than an agreed block of shares, other existing contributors can buy newly released shares at a discount. This dilutes the stake of the company that wants to take over the business. At the same time, there is no discount for the aggressor.
— Crown Jewels. By adopting this defensive tactic, the company is required by statute to sell its most valuable assets to shareholders if a serious threat appears on the horizon. This makes the organization less attractive to hostile corporations.
— Differential voting rights (DVR). To protect itself against a takeover, a company can set a higher dividend (a fraction of the profits of a public company) on shares with less voting rights. That is, two investor shares will receive one vote.
Thus, securities with less voting rights become more attractive to buy because of these dividends. And the top management keeps the shares with more voting rights and controls the situation.
— Employee Stock Ownership Plan (ESOP). Under this plan, team members can own a substantial fraction of the company. If a takeover threatens employee, shareholders are more likely to vote for management.